Tax implications of civil partnerships

Heterosexual couples in England and Wales will have another option when it comes to formalising their relationship. Although the government are yet to set a timescale, Prime Minister Teresa May announced that such couples will be able to enter into civil partnerships. Meaning they will now be eligible to access the tax benefits and rights that previously only came with marriage. Let’s take a look at some key financial benefits that entering a civil partnership can bring:

Leaving a legacy

Unless any assets are jointly owned, a cohabitee must be named in their partner’s Will in order to inherit from them. And even if the cohabitee is named, they would be liable to pay Inheritance Tax on any inheritance over the Nil Rate Band (currently valued at £325,000).

By contrast, a civil partner is entitled to inherit some (or in some cases all) of their civil partner’s estate regardless of whether or not a Will is in place, though if there’s no Will then the rules on intestacy will determine how much they get. And by qualifying for the spouse exemption, any assets left from one civil partner to another are not subject to Inheritance Tax.

Even if you think that legal or tax rules will give you the outcome you want, it’s generally better to have your say by making sure you have a Will in place that reflects your wishes as it will give you peace of mind that you’re leaving as much as possible to the people you choose.

Income Tax

Cohabitees are taxed separately and each person has their own personal allowance entitlement.

Being married or entering into a civil partnership can mean that a couple is entitled to a “Marriage Allowance” in addition to their own personal allowance. This allows for unused Personal Allowance of up to £1,190 to be transferred to the civil partner who earns more. Whilst this amount may not seem huge, it can save them £238 of tax each year so it can certainly add up in the long run – but remember there are certain criteria that must be met before any couple can use the marriage allowance.

The Marriage Allowance can be applied for online and the extra allowance will either be given by changing that civil partner’s tax code or when they submit their tax return so it’s important you make sure your application or documentation is correct.

Capital Gains Tax

Provided they are living together, civil partners can (subject to a couple of exceptions) transfer assets between them without having to pay Capital Gains Tax.

Cohabitees, on the other hand, do not have this luxury and would have to pay tax on any gain above the tax-free allowance – currently set at £11,700. However, cohabitees can each own and claim the private residence exemption, so two properties can be exempt from capital gains tax. Moving in together and subsequently selling a property after a civil partnership, when only one property will be exempt, could therefore be a very expensive decision.

Capital gains tax is a notoriously complex area and the tax implications of decisions made can be an unwelcome and expensive surprise. Make sure you avoid that by getting financial advice in advance of making changes.

State Pensions

This is another area where being in a civil partnership can provide additional rights. A civil partner has the right to claim a state retirement pension based on their civil partner’s national insurance contributions and has an automatic right to their partner’s pension when they die.

Cohabitees do not have these rights.

Considering entering a civil partnership?

While giving civil partnerships the same treatment as marriage for all tax and benefits purposes seems straightforward, it has resulted in some complicated legislation and that means people are understandably making mistakes.

As well as the overall complexity, the rules for the year when the civil partnership starts and ends are different for different taxes and benefits so getting advice before you make decisions can be very wise and leave you free to enjoy your life together knowing you’ve maximised the tax benefits and rights you’re entitled to.

If you have any questions about anything covered in this blog, or would like to discuss how you could be affected as a result of entering into or being in a civil partnership, your 1825 Financial Planner will be happy to help. And remember Laws and tax rules may change in the future and the information here is based on our understanding in November 2018. Personal circumstances also have an impact on tax treatment.

If you’ve yet to find a financial planner and you would like to find out more about how we can help, please get in touch.

In the UK, Civil partnerships are currently being offered to heterosexual couples in England and Wales only.

Investments can go down as well as up and you could get back less than you put in. The information in this blog or any response to comments should not be regarded as financial advice.